A more principled approach to investing is sweeping investment markets.
Impact investing, which seeks to generate a solid market return by investing in companies that have a positive social and environmental impact on society, is at the centre of this trend.
No longer is it enough that the investment schemes investors commit to, such as ethical funds, just avoid social damage. Nor are they happy to give up their financial returns to support companies that make a positive impact.
The UK impact market has grown strongly over the past few years and is now worth £2bn with £600m of annual deal flow. Institutional investors were the early adopters, but individual investors are a growing part of this trend and their involvement is only set to accelerate.
Sustainable bank Triodos found that nearly two thirds of UK citizens would prefer their money supported companies that were not only profitable, but also had a positive impact on society and the environment.
With ethical investing in some form going back two decades, impact investing now has a track record – and it’s a positive one. A recent report from Morningstar and WSJ shows that funds focused on sustainable investments have offered superior performance to non-sustainable investments over periods of one, three, five, and 10 years.
The shift provides an opportunity for advisers to take a key role in an investment approach that could increasingly be seen as standard. So what do advisers need to do to capitalise on this growing trend and ensure their clients’ portfolios are appropriately exposed to impact investing?
Know your client
Investor attitudes to impact investing are changing and as such need to be understood by their adviser. The starting point is to identify clients’ preferred SRI styles to discover if they have a preference about the effect their investments have on society, or the environment; whether they want to invest in a way that creates a positive impact but don’t mind how that goal is achieved; or, whether clients have specific ideas about how they want to achieve that goal.
Increase knowledge of Impact investing and the available products
While some advisers may need to develop their knowledge of impact investing, many will need to familiarise themselves with the range of products and funds available so they can identify and clearly articulate to clients the differences between these products.
The landscape will only become more complex as the involvement of individual investors in impact accelerates and asset managers capitalise on the growing interest by creating more strategies.
Opportunity to strengthen client relationships
Advisers should not see the move to impact investing as a separate discipline, but rather as an investment product, which involves their traditional skills of financial analysis, asset allocation and client care to ensure that they meet their clients’ objectives.
Through impact investing, advisers have the opportunity to strengthen their client relationships. Typically, such investments require a more in-depth, meaningful discussion but these conversations will help advisers to shape their clients’ portfolios to deliver robust market returns alongside positive environmental and social impact, which can in time help build stronger relationships and involve co-operating on a much deeper, personal level.
Belinda Thomas is partner at private investment specialists Triple Point, which has more than £800m AUM.